HES – Trade CDS 116bps, Base Case iCDS 39bps, Negative Case iCDS 53bps, 2027 4.300% Bond YTW of 3.089%, iYTW of 2.328%, Ba1 Rating from Moody’s, IG4+ (equivalent to Baa1) Rating from Valens, Low Refinancing Need

February 22, 2022

  • Credit markets are overstating credit risk with a YTW of 3.089% and a CDS of 116bps relative to an Intrinsic YTW of 2.328% and an Intrinsic CDS of 39bps. Furthermore, Moody’s is overstating the firm’s fundamental credit risk, with its Ba1 credit rating three notches lower than Valens’ IG4+ (Baa1) credit rating.
  • Incentives Dictate Behavior™ analysis highlights mostly favorable signals for credit holders. Management’s compensation framework should drive them to focus on all three value drivers: asset efficiency, growth, and margins, which should lead to Uniform ROA improvement and higher cash flows available for servicing obligations. Additionally, management members are material owners of HES equity relative to their annual compensation, indicating they may be well-aligned with shareholders for long-term value creation.
  • Earnings Call Forensics of the firm’s Q4 2021 earnings call (1/26) highlights that management is confident their cash cost is expected to decline by 25% over the next five years, and they are investing in high return projects made possible by durable cash flow growth. Furthermore, they are confident they have low leverage and a strong liquidity position

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